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What Lenders Usually Look For In A Mortgage?

June 16, 2023

Purchasing a home is one of the most exciting things you will ever do. It is also one of the most expensive. Unless you have a swimming pool full of cash, you'll need a mortgage to help finance the purchase of a home.

Applying for a mortgage can be a daunting task, especially if it's your first time. The good news is that by following these seven steps, you can ensure your success. 

But First, What Is A Mortgage?

A mortgage is a sort of loan that is used to fund the acquisition of real estate in Indiana, such as a home or a business building. It is a legal agreement between a borrower (usually an individual or a business) and a lender (typically a bank or a financial institution).

When someone wants to buy a property but doesn't have enough funds to pay for it in full, they can apply for a mortgage. The lender provides the necessary funds, and in return, the borrower agrees to make regular payments, usually on a monthly basis, over a specified period of time, known as the loan term.

The property being purchased acts as collateral for the mortgage loan. This means that if the borrower fails to repay the loan as agreed, the lender has the right to take possession of the property through a process called foreclosure in order to recover the outstanding amount.

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Mortgages can vary in terms of interest rates, repayment terms, and down payment requirements. The interest rate can be fixed, meaning it remains the same throughout the loan term, or adjustable, which means it can fluctuate based on market conditions. The repayment term can range from 15 to 30 years, although other terms are also available.

Overall, mortgages make it possible for individuals and businesses to afford properties by spreading the cost over an extended period of time, making homeownership more accessible to many people.

What Lenders Usually Look For?

While qualifying criteria differ depending on the lender and loan type, there are a few general needs that mortgage lenders look for, including:

Good Credit

The credit score you'll need will be determined by the type of mortgage you seek. For conventional mortgages, you're usually required to have at least a 620 credit score. However, with a lower credit score, you may be able to qualify for other types of mortgages, such as those backed by the following:

  • Federal Housing Administration (FHA)
  • U.S. Department of Agriculture (USDA)
  • Department of Veterans Affairs (VA)

Also, remember that the higher your credit score, the lower your interest rate. 

Stable Income

Loan providers want to see that you can afford to repay your loan, so you'll need to give documentation of both steady income and employment, such as tax returns, pay stubs, or 1099 forms.

They will also assess any assets you have that you could use in the event of a financial emergency, such as money market accounts, stock portfolios, or any properties you own.

Debt-To-Income (DTI) Ratio

Your DTI ratio is the amount you owe in monthly debt payments divided by your income. To qualify for a mortgage, your DTI ratio should be less than 43% and no higher than 50%.

Lenders will also likely look to see if your monthly housing expenses, including your mortgage, homeowners insurance, and property taxes, do not exceed 28% of your gross income.

Down Payment

The size of your down payment will be determined by the lender and the type of mortgage you choose. A standard mortgage typically requires a down payment of at least 3% of the home's purchase price—but bear in mind that to avoid private mortgage insurance (PMI), you must put at least 20% down. A down payment of at least 3.5% is required for an FHA loan, but USDA and VA loans do not.

Finally, the more money you put down, the lesser the risk for the lender. A greater down payment can also lower your loan-to-value (LTV) ratio, which is attractive to lenders.

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8315 W. 10th Street
Indianapolis IN 46234

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